By David Becker, Stephen K. Cooper and Dave Hansen, CCH Washington News Staff, and Paul N. Gada, CCH Toolkit Staff Writer
Next time your telephone bill comes, take a close look at all the itemized charges. You will quickly note that there are a number of taxes tacked on to your account. If you feel you are paying too much tax for a basic necessity like phone service, you are absolutely correct.
Buckling under the combined weight of five federal circuit courts of appeal losses, numerous district court losses, and the outcry of congressional leaders and the communications industry, the IRS has finally conceded that long distance telephone charges that vary only by time elapsed (not by distance) are not taxable. The IRS now says that it will no longer litigate the issue and will instead follow the federal appellate court opinions that rejected its position.
In fact, the IRS is going one step further than the courts in that it will no longer collect the three-percent excise tax on any long distance services, even those plans that bill based on both elapsed transmission time and distance of the call.
The government, therefore, will stop collecting the federal excise tax on long distance telephone service and will issue credits or refunds of all excise taxes paid on long-distance service billed after February 28, 2003, along with interest.
As an example, the IRS's most recent district court loss cost it over $879,000 in refunds to a single company (The ServiceMaster Company). The total refund amount of the new government payout will be in the billions of dollars.
Outgoing Treasury Secretary John Snow said in a press release on May 25, 2006, that the telephone tax was an "antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history." Snow was referring to the fact that the tax on long distance service was first imposed in 1898 to finance the Spanish-American War. Snow has asked Congress to repeal the tax on local service.
Senator Chuck Grassley (R-Iowa), who chairs the Senate Finance Committee, said in a press release that the excise tax on long distance calls is outdated, and he cheered its demise: "It's time to give up the ghost and get rid of this outdated tax," Grassley said. "Today is a turning point in the long battle to stop the levy for a war that ended 100 years ago. This tax hits every telephone owner, but it doesn't pay for any specific program. It now pours billions into the U.S. Treasury every year for no reason. It's time to hang up the telephone tax."
The IRS notice does away only with the long distance portion of the tax, and Grassley said he intends to have the Senate Finance Committee consider legislation to abolish the tax altogether. Senator Max Baucus (D-Mont.), ranking member of the Senate Finance Committee, also praised this development, saying that "[t]he telephone excise tax is a prime example of the need to overhaul our telecom laws."
The key points of the IRS's new policy concerning the communications excise tax are discussed below:
- Long distance and bundled service nontaxable--Long distance service is communication with persons outside the local telephone system of the caller. Bundled service is local and long distance service provided under a plan that does not list the local telephone service charge separately. Bundled service includes Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with elapsed transmission time. Both long distance service and bundled service are now nontaxable. As a result, taxpayers are no longer required to pay tax for long distance or bundled service ("nontaxable service"), but collectors should continue to collect and pay over the tax on local-only service charges.
- Refunds with interest back to March 2003--Collectors or taxpayers may request a refund of tax paid for nontaxable service that was billed to the taxpayers after February 28, 2003, and before August 1, 2006 (the "relevant period"). The refund can be claimed on 2006 income tax returns. In order to minimize the burden on taxpayers, the IRS promises to soon announce a simplified method that individuals may use. "So taxpayers won't have to spend time digging through old telephone bills, we're designing a straightforward process that taxpayers may use when they file their tax returns next year," said IRS Commissioner Mark W. Everson. "Claiming a refund will be simple and fair."
- Effect on collectors--The IRS has directed collectors to stop collecting and paying over nontaxable services billed after July 31, 2006. Collectors should not pay over to the IRS any tax on nontaxable service that is billed after that date. As to amounts of tax paid on nontaxable services billed before August 1, 2006, collectors may repay those amounts to taxpayers, but are not obligated to do so. Note, however, that, while collectors are directed to stop collecting tax on services billed after July 31, 2006, collectors are not required to report to the IRS any refusal by their customers to pay any tax on nontaxable service that is billed after May 25, 2006.
- Cut-off date for refunds--The IRS will deny all taxpayer requests for refund of tax on nontaxable service that is billed after July 31, 2006. Such requests should instead be directed to the collector.
- Particular forms required--Taxpayers may request a credit or refund of tax only on their 2006 federal income tax return, which is the income tax return for calendar year 2006, or the first tax year including December 31, 2006. Those who are not otherwise required to file a federal income tax return must nevertheless file a return to obtain a credit or refund. Concerning the proper way to request a credit or refund, the notice provides specific guidance for individuals, entities, partnerships, S corporations, estates and trusts, tax-exempt organizations, corporations and other nonfiling entities. Generally, the IRS will not process requests for a credit or refund on forms other than those prescribed by the notice.
- Certification and recordkeeping--Instructions to the various federal income tax returns will require taxpayers to certify that (1) the taxpayer has not received a credit or refund from the collector, and (2) the taxpayer will not ask the collector for a credit or refund and has withdrawn any request that the taxpayer previously submitted. Except for taxpayers requesting the safe harbor amount (see below), the instructions will also require taxpayers to retain records to substantiate their requests.
- Safe harbor amount. Individual taxpayers can request a safe harbor amount without having any supporting documentation, but qualify to make that request only if they (1) have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006, (2) have not received a credit or refund from the service provider, and (3) have not requested a credit or refund from the service provider or have withdrawn any request. The safe harbor amount is still under consideration and will be announced in later guidance. No safe harbor amount is allowed for entities, however, and they can request only the actual amount of tax paid on nontaxable service.
- Requests by collectors--A collector may request a refund or credit only if the person that paid over the tax to the government establishes that it repaid the amount to the taxpayer, or if it obtains written consent from the taxpayer allowing the collector to request the credit or refund. The notice provides separate guidance for regular method collectors and alternative method collectors.
- Interest on credit or refund taxable--Interest on the credit or refund of the tax paid for nontaxable service must be included as income on the taxpayer's income tax return for the tax year in which the interest is received or accrued. Therefore, individuals are generally required to report the interest on their 2007 income tax returns.
- Estimated taxes--A credit or refund claimed with respect to the excise tax will not be considered to be a credit against tax for purposes of determining the amount of estimated tax installments to be paid in 2006. For purposes of determining the amount of the required installments of estimated tax for 2007, the income attributable to the excise tax credit or refund may be taken into account on the date the income is paid or credited in the case of a cash method taxpayer and on the date the return making the request is filed in the case of an accrual method taxpayer.
Congressional Response
Speaking at a Capitol Hill press conference, Snow told reporters that the revenues from the telephone tax are added to the Treasury's general fund. Snow said he did not know exactly how much revenue the telephone tax brings in to the government each year, but the strong U.S. economy, which has seen a surge in tax receipts in recent years, would easily replace the lost income.
However, a recent report by the Congressional Research Service estimated that the federal excise telephone tax generated $5.9 billion in revenue in fiscal 2005. In the April 24 report, "The Telephone Excise Tax: An Economic Analysis," the CRS quoted a Congressional Budget Office estimate that a complete repeal of the tax would cost $67 billion over the FY 2006 to FY 2015 budget window.
According to Rep. Gary Miller (R-Calif.), three year's worth of refunds on all telephone excise taxes paid for long-distance service, plus interest, is expected to amount to a $15 billion refund for taxpayers. Miller is the chief sponsor of the Telephone Excise Tax Repeal Act of 2005, which would immediately eliminate the excise tax on all telephone services. The measure, which has more than 180 cosponsors, would affect the tax on local telephone service, which was not included in the Treasury action.
House Ways and Means Committee Member Melissa Hart (R-Penn.) said the Treasury's decision to refund the telephone tax was based on losses in the Court of Federal Claims, five federal district courts and three circuit courts of appeal. In November, Snow told lawmakers that he would reconsider collecting the tax if the Sixth Circuit Court of Appeals decided not to rehear one of the cases.
Hart said the telephone tax should only have applied to long distance calls when the charge for each call varied with distance and elapsed transmission time. "Most call plans today, however, do not price long distance calls based on distance," she said. "For example, most carriers now have standardized rates that charge the same for a call from Pittsburgh to New York or a call placed from Pittsburgh to Seattle, making the FET (federal excise tax) inapplicable."
- Related items:
- New Retirement Savings Opportunities in Recent Tax Relief Law
- Congress Extends Tax Relief Provisions with Offsets, Seeks To Reinstate Expired Credits
- New Tax Year Means Many Tax Changes to Consider
Added to the news on June 5, 2006.
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